Variable Life Insurance:
Possibilities for Young Investors
If you are allocating
a portion of your income to retirement investmentsand you should
beask your broker if he is able to sell variable life products.
Variable lifealso called
appreciable lifeis not a universal, "one size fits all"
policy, and is probably not for senior investors, but they can be
a way to fulfill two needs at once.
How? First, you know you need life insurance unless you wealthy
enough that your family will be taken care of in the event of your
Secondly, even if your
employer is putting money into a 401 K or pension plan for you,
the amount you can invest via pay-roll deduction is limited. If
you work for the same employer for 20 or 30 years (unlikely in today's
every changing world of mergers, closings, acquisitions, etc), and
if your employer has a matching plan though which he contributes
additional funds beyond your payroll deduction, a 401K can be significant.
However, you need to recognize that while many of today's babyboomer
generation and young seniors (early 60s) have huge 401K and IRA
resources, the day of the generous employer is over. A pension plan
offered as part of a new job today could be sold to a third party
next month, and the terms radically changed.
Bottom line? The only
way to KNOW that you are saving for retirement is to decide from
your very first job that if you make a dollar, a dime will go into
savings. It sounds insignificant, but if you get into the habit
of paying yourself first, you'll have money when that day comes
that you need it.
as Part of the Plan
So, what does that have to do with Variable Life Insurance? A Variable
Life policywhich can only be sold by a person with a General Securities
licenseoffers you a way to have life insurance and investments
at the same time. You could think of it as having a life insurance
rider on your mutual fund account, although that isn't entirely
accurate. You have a life insurance policy of a certain face amount.
Your premiums are invested in mutual funds, stocks, bonds, or anything
you choose that is available through the company. In the early years,
a portion of your premium goes to pay the cost of insurance and
fees, and the remainder is invested. If your investments perform
well, you may be able to stop paying your premium in later years
and simply let the investments pay for the death benefit.
People often use VL policies
as a shelter for their investments, particularly if saving for a
child's college education. That's because life insurance is sheltered
from a financial need analysis, meaning the value in your life insurance
policy is not included when applying for financial aid. Furthermore,
there are no limits on the amount of money that can be invested,
and contributions in the mutual fund side can be withdrawn or borrowed
against without tax penaltyunlike an IRA.
VL Not for Everyone
Variable life policies are not for everyone, and they do have some
downsides. The biggest may be that if your account value drops due
to a down turn in the market, you may have to increase your premium
to keep from having a lost in the death benefit. Withdrawals from
the accumulation will also reduce the death benefit. Finally, while
there is no "tax" penalty for withdrawals, there are usually surrender
charges in the first 10 to 20 years, depending on the company. Because
of these surrender charges, it is not advisable to use a VL as a
college investment tool unless the child is very young when the
policy is purchased. Also, while withdrawals are considered "not
taxable," they can be taxable if the total of the withdrawals is
more than the premium that was paid in.
There is no question
that a VL is riskier than other types of life insurance as there
is no guarantee on your cash value. Most companies will offer a
minimum death benefit that will be paid as long as you continue
to pay a premium; if you die prematurely, however, your beneficiary
may get the death benefit but not the investment side of the policy.
Again, that varies by company, so you need to have all the details
before purchasing a VL. Furthermore, you need to either be stock
market savvy yourself or have a broker with a track record whom
you can trust to monitor the investment side of the policy.
Copyright © 1998 -
All Rights Reserved